Friday, February 22, 2013

Another decision you must make when considering rental properties -- what type of property
to do you look to invest in? Based on the market you’re considering, are
retail centers preferred or do you see office uses as being more
optimal? Let’s first look at Retail.

Retail properties come in many shapes and
sizes.Think neighbourhood plazas which might include a fast food
restaurant, laundromat/dry cleaner, variety store, beauty salon, etc. These are viewed as convenience centres and for the most part, serve the immediate
neighbourhood. The same can be said for freestanding buildings (serving
a single tenant), but again, target the neighbourhood demographic as their
primary customer.

In looking at successful retail
opportunities, pay particular attention to not onlythe property’scurrent vacancy status, but what itshistorical pattern has been. In addition, you want to look at theavailability of parking, neighbouring tenant mix, and the tenure of current
occupants. Bottom line – is it a quality development which results in
successful and stable retail operations?

In addition, you should examine general
vacancy trends in your market. Stronger lease rates typically go with higher occupanciesand vice versa. It’s again a due diligence exercise – but
the data/information is out there and you need to make best efforts to obtain
it.Stay where the action is and look where retail tenantssucceed.

As a final note, with respect to financing retail properties, certain
lenders may prefer this area of real estate versus
other categories (ie. office or industrial). Keepthis in mind as you consider financing options.

Thursday, February 14, 2013

This is a debate that has gone on for years – do you opt for a Single Tenant property or do you consider only Multi-Tenant buildings.Lots to consider here, and as with everything in real estate investing, ONE SIZE DOES NOT FIT ALL!

Look back at your objectives and confirm what you are trying to achieve. Is it ROI? Is it minimal management? Best opportunity for price appreciation? Risk tolerance? Income growth through lease rate expansion? Mid-long term lease commitments? Triple A Covenants Only?These may be some of the key criteria which you have identified.

Now let’s look at which Property Type, each of the above tends to favour.

ROI - Multi-Tenant more likely

Price Appreciation - Multi-Tenant more likely

Management - Single Tenant less management (if any)

Risk - Multi-Tenant more likely (spread across multiple leases)

Income Growth - Multi-Tenant more likely (given multiple leases)

Long Term Leases - Single Tenant more likely

Triple A Covenant - Single Tenant more likely

You can see the benefits of each, given the criteria that we’ve set out – but it all comes down to what you are prioritizing. There are clearly advantages to both and again as we’ve said many times, it is a set of property objectives that must be aligned with your particular market. For those of you keeping score, the above comes out 4-3, in favour of Multi-Tenant investments.

Wednesday, February 6, 2013

Since leverage involves debt, let’s discuss how we analyze the debt relative to the property’s cash flow. The standard measurement within the investing world, is referred to as the Debt Coverage Ratio (DCR). The math is pretty straightforward –the ratio measures the property’s net cash flow divided by the annual mortgage costs.

Consider the following examples:

Property 1 Property 2

Net Operating Income - $75,000Net Operating Income - $45,000

Mortgage Costs (Debt) –$50,000Mortgage Costs (Debt) - $50,000

DCR – 1.5DCR – 0.9

All Dollar Amounts are annual

Now in the case of Property 1, the cash flow comfortably covers the mortgage requirement with a residual leftover (AKA –return on cash invested). With Property 2, a deficit is created (of $5000), which in essence becomes an annual loss and generates a negative return on your cash invested.

The significance of this exercise becomes really clear once you look to arrange mortgage financing in either case. The 1.5 DCR will receive good support with the Commercial Mortgage lenders, as the cash flow of the property provides a cushion against the mortgaging costs you will be incurring. However in the case of the 0.9 DCR, the deficit will raise red flags with Commercial Mortgage lenders and certainly fall outside of their normal guidelines.

Standards will vary from area to area and lender to lender, in terms of DCR ratios required. But more importantly, it must fit with your own objectives for investing and in considering viable rental property options.

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Mark and Russel Lalovich

Lalovich Real Estate

Top producing Commercial Real Estate team in Windsor, Ontario. Please contact us for more info about our services by phone 519-966-0444, by email at russel@lalovichrealestate.com or visit our website at www.lalovichrealestate.com.

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